Investors want to know: Will Paychex (Nasdaq: PAYX) top estimates for the second quarter running? The payroll specialist's third-quarter results for fiscal 2008 are due out tomorrow.

What analysts say:

  • Buy, sell, or waffle? The 19 analysts following Paychex give it eight buy ratings and 11 holds.
  • Revenue. On average, they're looking for 10% revenue growth, to $533.5 million.
  • Earnings. Profits are predicted to pace revenue growth, with an 11% increase to $0.39 per share.

What management says:
CEO Jonathan Judge characterized this year's results by saying that they continue to "meet [his] expectations." Paychex continued to post respectable revenue growth in a tough economic environment and earned "excellent margins" thereon. Continued share buybacks added to the good news and magnified the company's 11% increase in net income in the first half, such that per-share earnings grew 13%. As we've come to expect, Judge again noted that human-resources revenue grew much faster than did payroll-service revenue -- 22% versus 9%.

According to management, we should expect similar growth numbers to hold true throughout the year -- high-single-digit sales growth in payroll, lower-20s growth in HR, and net income about 12% higher than last year.

What management does:
Speaking of last year, after being bogged down in litigation costs back then, Paychex's margins are back on the rise. They continue to dwarf the margins from rivals ADP (NYSE: ADP), Administaff (NYSE: ASF), and Intuit (Nasdaq: INTU).

Margins

8/06

11/06

2/07

5/07

8/07

11/07

Gross

66.8%

66.9%

67.2%

67.4%

67.6%

67.9%

Operating

38.9%

39%

38.5%

37.2%

37.5%

37.9%

Net

28%

28.3%

28.1%

27.3%

27.5%

27.5%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
So far this year, Paychex has generated $318.5 million in free cash flow. Incidentally, it's also worth pointing out (especially since I've criticized the stock as overvalued in the past) that Paychex's free cash flow outstrips its net income by about 7%.

In other words, Paychex generates more cash profit than GAAP accounting standards allow it to report as net income. Unfortunately, management isn't in the habit of including cash flow statements with its earnings releases, so if there's good news of this sort to look forward to, we'll probably have to wait for the 10-Q to come out before we can see it.

For more on Paychex, read:

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.